U.S. homebuilders are feeling optimistic about the future of their businesses, as they see an increase in demand despite high mortgage rates. According to the National Association of Home Builders/Wells Fargo Housing Market Index, homebuilder sentiment rose by 3 points in March to reach a reading of 51. This marks the fourth consecutive month of gains and the highest level since July. Additionally, sentiment moved into positive territory for the first time since July, with 50 being the dividing line between positive and negative sentiment.
While mortgage rates initially decreased in the first week of March, they quickly rebounded in the second week. The average rate on a 30-year fixed mortgage has remained around 7% since early February. Despite this, buyer demand remains strong, and experts believe that if mortgage rates continue to fall later in the year, more consumers will enter the market. NAHB Chairman Carl Harris, a custom home builder from Wichita, Kansas, stated, “Buyer demand remains brisk and we expect more consumers to jump off the sidelines and into the marketplace if mortgage rates continue to fall later this year.”
However, homebuilders still face challenges on the supply side of the market. There is a scarcity of buildable lots and skilled labor, and new restrictive codes have increased the cost of building homes. These factors contribute to the struggles that builders face in meeting the demand for housing.
The components of the index also saw positive movement. Current sales conditions rose by 4 points to 56, expectations for the next six months rose by 2 points to 62, and buyer traffic increased by 2 points to 34. On a regional level, sentiment rose the most in the Midwest and West.
A notable finding from the report is that fewer builders are lowering home prices in order to attract buyers. In March, only 24% of builders reported cutting home prices, down from 36% in December 2023. This marks the lowest share since July. The average price cut remains steady at around 6%. Instead of reducing prices, builders are utilizing sales incentives such as buying down mortgage rates.
Looking ahead, experts predict that future rate cuts announced by the Federal Reserve in the second half of 2024 will attract more prospective buyers to the market. Lower financing costs will encourage consumers to enter the housing market. However, as home building activity increases, builders may face challenges posed by rising material prices, particularly for lumber.
Overall, the increase in homebuilder sentiment and positive market conditions suggest a promising outlook for the housing industry. Despite the obstacles faced by builders, the strong demand and potential for future rate cuts provide reasons for optimism.
